HENDERSONVILLE, Tennessee—The continued increase in number of rooms sold is welcome news for the hotel industry.

But where are these rooms originating? Thanks to segmentation data, we are able to differentiate group and transient demand and “peel the onion,” so to speak. According to STR, parent company to HotelNewsNow.com, group rooms are defined as rooms sold in blocks of 10 or more. Transient rooms make up the other demand. STR also tracks long-term stay rooms (or “contract rooms”), but for our discussion, we will omit these because they only make up a small fraction of national room demand. 

The data is gathered from high-end hotels across the United States, namely properties in the luxury and upper-upscale chain segments as well as high-end independent hotels.

As shown in chart 1, transient room demand now is higher than it was last year, and more importantly, higher than the most recent peak in 2007. The chart highlights the seasonal swing to transient demand, which is highest during the summer holiday season and decreases in the early part of the year. Despite macroeconomic uncertainty, this chart clearly shows that demand in the U.S. hotel industry is resilient, and both business and leisure travelers are traveling in higher numbers than ever before.

Chart 2 details how the transient average daily rate has moved over time with ADR in 2007—the peak year for transient rooms—well above the most recent 2011 numbers. Hoteliers are charging some US$10 less than they did four years ago. Combining the information on the two transient charts raises the question: Is the strong transient demand environment a function of the low rates, or would the demand have appeared anyway and hoteliers simply left money on the table? Obviously, both points of view are partially true, but hoteliers could be more aggressive with their rate setting throughout the year, especially given the high occupancies at the upper end of the market.

In contrast to the strong transient demand, chart 3 shows that group demand this year still is below peak levels as recorded in 2007. Yet the numbers are on par with 2011 and only marginally below the prior peak in 2008. Again, this certainly can be viewed as very good news because it is a further indicator that the negative macroeconomic sentiments did not curtail meeting attendance or convention-visitation numbers during the past few years. A crucial indicator to watch in 2012 will be the health of the meeting industry. This is notable because group demand often provides much needed occupancy, and that allows hoteliers to yield manage their transient rates.

Group room rates, as displayed in chart 4, are sold at a discount compared to transient rates, and they undergo some wide fluctuation. The group ADR traditionally is lower than transient rate for the following reasons: Rooms are bought in bulk; the booking window can span between 30 days and three years; and, perhaps most importantly, those groups make up the crucial base layer of occupancy that allows hoteliers to charge transient travelers higher rates because rooms are scarcer. Since group ADR peaked in2008, it consistently has lagged behind transient ADR. Traditionally, the summer months, which show higher transient demand, show some dip in group demand as well as a sharp decline in group room ADR. In 2008, the difference between peak ADR in February and the lowest ADR in August was approximately US$20. 

For a slightly different perspective, in chart 5 we show the year-to-date ADR of group and transient rooms for the past five years. In the first 10 months of 2011, transient-room rates increased US$7 over the same period last year, from US$154 to US$161. While this increase of 4.5% seems healthy on the surface, we have to keep in mind that for the first 10 months of 2008, the transient rate was US$178 or an additional US$17 (11%) higher than today. The macroeconomic slowdown and the banking crisis led to ADR discounting across the board, and in their wake transient rates fell by around 13.5% between 2008 and 2009. As in every prior downturn, the speed of rate declines is never matched by the speed of rate increases, and while it took only one year to discount rates by US$27, it will likely be 2014 or later until transient rates hit their prior peak. 

During the peak year 2008, we recorded group room rates at US$158, about US$20 below the transient rate of 2008.  As with transient rates, the recession took a toll on meeting attendance and group rates, and they declined in 2010 to only US$144.  Interestingly, we recorded the lowest transient rates in 2009, however group rooms saw their trough a year later. 

Even though myriad different influences shape group ADR, it is fair to assume that the rate negotiations are at least, in part, based on the prevailing transient rate. Future group rates are then a function of the current pricing environment but are always “lagging” transient rates. This is true for both the absolute rate and the percent change. In chart 6, before and during the recession, the transient ADR premium over the group ADR was more than US$20 on an annual basis. As transient rates were discounted much faster than group rates; in late 2010 this premium shrank to US$3.35. As ADRs continue to grow, transient rates again are US$10 more expensive than group rates, and the trajectory of the curve promises further increases. 

It is fair to assume that during the next 12 to 18 months, the transient premium again will reach prior peaks. However, this is only partially good news though, because the absolute levels of ADR likely will not grow back to their prior peak as quickly. The continued lack of forward visibility due to shorter booking windows will be a factor when room blocks for business and leisure groups are negotiated for 2012 and 2013. In fact, sales directors will not fully appreciate the lack of new room supply that still will govern the industry in 2012. This, in turn, should favorably impact occupancies in their markets. 

New hotel rooms will continue to be few and far between, and the increases in demand will have to be absorbed by the existing hotels, increasing occupancies above current levels. Hoteliers will negotiate group room rates from a position of perceived weakness. However, we suggest that during the next few years, the ongoing “seller’s market” should continue, as our positive demand forecast indicates. Given the favorable hotel market conditions, the time to monetize group demand is now.